What’s a Business Person to Do?
What does all this mean for the business owner? First, a business owner must understand the cost structure of her business—the costs of the fixed and variable inputs needed to produce various levels of output.
Second, she must find the right mix of fixed and variable inputs. Sometimes the decision to replace people with capital is a no-brainer. For example, one worker with a leaf blower will be more productive than two workers with rakes.
Third, the owner must minimize total costs by using the right mix of inputs to produce the right quantity. The mix of inputs that will minimize costs will be the combination where the marginal product per dollar of the variable inputs is equal to the marginal product per dollar ...